The Winners and Losers of Today's XRP Judgment
Dear Bankless Nation,
Gary Gensler and his SEC cronies are down bad after a summary judgment in the SEC v. Ripple Labs case today signaled that XRP, the digital token, is not a security. The news sent XRP prices soaring and pushed up plenty of other crypto assets as well.
Today, we unpack the ruling, showcasing the winners, losers and lingering uncertainties availed by this latest development.
- Bankless team
Big news just dropped! We’re only halfway through 2023, but we may have just received the most impactful legal decision of the year... Earlier today, Judge Analisa Torres issued a summary judgment in the SEC v. Ripple Labs case!
The SEC’s case against Ripple Labs and the firm’s key personnel, CEO Brad Garlinghouse and founder Chris Larsen (the defendants), has been stuck in the court system since December 2020. In this case, the SEC alleges that Ripple failed to register XRP as a security before proceeding to offer up $1.38B worth of the token for sale or other consideration.
Today, we’re dissecting what this summary judgment means, examining why it’s bullish for certain crypto assets, and unpacking why the result left both Ripple and the SEC dissatisfied.
🧐 Is XRP a security?
In a major win for digital assets, the Court found that XRP, as a digital token, does not satisfy the requirements of the Howey test, and therefore is not a security!
The security status of the XRP token, however, is irrelevant to the issue of whether XRP transactions constituted investment contracts. After all, even certain commodities transactions can be considered as investment contracts, depending on the circumstances of the sale.
To determine whether a transaction qualifies as an investment contract, U.S. Courts take a highly nuanced approach and individually examine the validity of such claims against the specific circumstances of each transaction type.
The SEC claimed that multiple forms of transactions constituted unregistered XRP offerings and sales, but after close scrutiny, the Court found that only one did: Ripple’s institutional sales.
Sophisticated buyers involved in Ripple’s institutional sales purchased XRP directly from the firm. As such, they would have reasonably expected Ripple to use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP. This scheme satisfies all four prongs of the Howey Test.
On the other hand, purchasers of XRP tokens sold by Ripple’s programmatic distributions engaged in blind transactions and had no possible way of knowing if Ripple received their funds. These types of transactions were viewed by the court as not constituting investment contracts.
Additionally, the Court found that the distributions of XRP tokens to pay employees and compensate third parties for the development of XRP and the XRP Ledger were also not viewed as investment contracts, as there was no investor infusion of capital into Ripple under this scheme.
Secondary market sales of XRP fell outside of the scope of the case and it is unknown at this time whether such offerings or sales would constitute investment contracts. Unfortunately, today’s summary judgment has left the crypto industry with a question mark hovering over the legality of this segment of liquid crypto markets.
🏆 The Winners
Unsurprisingly, the crypto assets pumping the most today are the ones that have been directly targeted by the SEC.
XRP has absolutely ripped and the blue chip crypto assets targeted by the SEC’s previous enforcement actions have pumped harder than most on the news, with SOL and MATIC achieving double digit gains.
In one fell swoop, the FUD peddled by the SEC over select tokens' regulatory status over the past few months vanished. Coinbase, itself the target of an ongoing SEC investigation, has been one of today’s biggest beneficiaries (other than XRP) and is up nearly 25% on the day!
While today’s summary judgment is not as broad as many in the crypto community might have wished, with concerns still remaining around the legality of secondary market sales, Judge Torres’s decision does help the crypto industry by establishing a crucial precedent that can be used by exchanges, like Coinbase, in their fight against the SEC.
😭 The Losers
Despite being a “win” for the crypto industry, the same cannot be said for either of the parties involved in this case…
For the SEC, today’s summary judgment is a resounding defeat!
While the agency can continue to prosecute Ripple for unregistered institutional sales, many of Ripple's token distribution mechanisms were found to be completely legal and the path to legalizing secondary market token sales may have been opened with today’s verdict. The SEC will likely appeal Judge Torres’s ruling to prevent it from being used as the basis for future legal arguments.
For Ripple Labs and the key personnel who facilitated the sale of XRP tokens directly to investors, this case is just getting started!
Ripple Labs and the named co-defendants inevitably need to face the SEC in court, unless they manage to successfully appeal the decision that their institutional sales qualified as an unregistered securities offering.
Consequences are severe for failing to defend against the allegations, as the SEC is seeking the disgorgement of illegally raised funds (Ripple raised $729M through institutional sales) and want to prohibit the defendants from offering or selling XRP to any entity or person.
Only time will tell how the SEC v. Ripple case plays out, but despite both parties in today’s decision being left at least partially dissatisfied, it's clear that investors see today's summary judgment as bullish for the crypto industry entities also facing SEC attention.